Benchmark Responsible Investment: Fundraising charities and foundations in the Netherlands 2011

Transcription

1 Benchmark Responsible Investment: Fundraising charities and foundations in the Netherlands 2011

2 Pieterstraat JT Utrecht T +31 (0) info@vbdo.nl Benchmark Responsible Investment: Fundraising charities and foundations in the Netherlands 2011 A research paper prepared by Vereniging van Beleggers voor Duurzame Ontwikkeling (VBDO) VBDO: Rudy Verstappen, MSc Kees Gootjes, MSc In cooperation with: Maastricht University: Prof. Dr. Harry Hummels December 2011 This report has been made possible by the financial support of Stichting Pequeno. The contents, conclusions and recommendations are, however, the sole responsibility of the VBDO. VBDO report by the Dutch Association of Investors for Sustainable Development (Vereniging van Beleggers voor Duurzame Ontwikkeling) Disclaimer VBDO will assume no responsibility or legal liability for incorrect or misleading information provided by the sources used for this report. 2 2 THE DUTCH A SSOCIATION OF INVESTORS FOR SUSTAINABLE DEVELOPMENT

3 Foreword Stichting Pequeno Big ideals, countless innovative projects to address the problems that the world is facing, glowing stories of expected results. All these things can be found at non-profit organisations, where doing good gets all the room. These are wonderful, of course, but slowly the question is more and more being raised what impact all these good initiatives have had. The complexity of the world s problems is more resistant to change than many idealists believe. Non-profit organisations work with capital that does not need to create profit. There is, as a result, room for innovation and renewal. Risks are an inevitable part of this. Many are still convinced that sustainable investment brings more risks with it. Partly for that reason people are still very careful when considering using the capital and/or reserves of their organisation to invest in sustainable development. The opposite, however, has been proven time and again. This is a missed opportunity. If non-profit organisations had maintained the same level of risk but had chosen for investments where people and planet were given priority, the financial losses would certainly not have been higher, and there s a good chance they would have been lower. And even the possibly disappointing financial results would have been worth it because they created results for people and planet. The non-profit sector is heavily affected by its public image. It seems as if reputational damage is becoming the most important factor. This is especially true for fundraising charities. Organisations generally take on a defensive position, even though making the right choices when investing the reserves can greatly benefit the organisation. On top of this, it is much easier to explain losses as a result of investments that contributed to sustainable development as they led to better production methods. This also benefits the future of our planet, and in this way, the investment policy is another possibility to achieve this goal. This is the second time that this research has been conducted. It is good to see that the response rate is higher than last year. Unfortunately, despite a few positive points, there is little visible change in the level of sustainable investment. But the standard has been set. If we make a change together, we can show that our capital and the returns on that capital and other sources of profit contribute to our mission. Where the government is withdrawing, civil society can make a necessary contribution with all its available resources to the quality of life for many, both here and internationally. With our head held high we can convince the policymakers to make all the assets of the non-profit organisations tax-free. After all, they serve society in general as well. Let s let this report support the efforts to add a new dimension to doing good that we can all be proud of. Irene Mol, Stichting Pequeno 3

4 Foreword VBDO Welcome to the VBDO s second annual report on the extent to which fundraising charities and foundations in the Netherlands invest responsibly. The VBDO works to create a fully sustainable capital market, and encourages all the diffent types of investors to contribute to this goal. That is why we also do research on the responsible investment policies of pension funds, insurance companies and, more recently, religious institutions. Fundraising charities and foundations, or non-profit organisations, have a special role. Indeed, where commercial companies aim to maximize financial return, you can expect that for charities, achieving the mission has precedence over all else. Of course, a good financial return is important to support projects to achieve that mission, but by not looking at your investments in terms of sustainability, you miss an opportunity to achieve your mission with your financial assets. If you invest in companies or projects that, for example, are energy efficient, work to prevent child labor or focus on developing local communities in developing countries, you allow your capital to work for you and achieve not just financial, but also environmental and social return. Conversely, a wrong investment doesn t just work against your mission (eg. if you are a development organization unwittingly investing in a business that does not respect human rights), but also negatively affects your reputation. And that can have an immediate effect on your income... This research would not have been possible without the support of Stichting Pequeno, both financially and in the process, whom I warmly thank. I would also like to thank the associations VFI and FIN for their cooperation with this report, something that underlines the importance of sustainable investment for their members. Both organisations have developed a number of initiatives to bring this topic to the attention of their members. The VBDO is itself a non-profit organisation, and offers its expertise to all parties who wish to invest money responsibly and sustainably. I wish you great reading pleasure for this report, and wish the industry every success in making their investments more sustainable: to create a better world. Giuseppe van der Helm Director VBDO 4

5 Contents Foreword Stiching Pequeno 3 Foreword VBDO 4 Executive summary 6 Samenvatting 8 Chapter 1 Introduction 11 Chapter 2 Making a buck and the world a better place Separation or connection? Volatility of financial markets The increasing importance of Responsible Investing Creating shared value and investing for impact Collaboration Closing remarks 23 Chapter 3 Research objective and methodology Research objective Selection of organizations Research period Research process Division of tasks and responsibilities Assessment methodology 26 Chapter 4 Results Response rate Fundraising charities Direct investing fundraising charities Non-investing fundraising charities Foundations Direct investing foundations Non-investing foundations Aggregated results Advisory Panel 60 Chapter 5 Conclusions and recommendations Conclusions Recommendations 63 Appendices 64 5

6 Executive summary The report you have in front of you is the second annual edition of the VBDO Benchmark study among fundraising charities and foundations in the Netherlands. This report has once again been made possible by Stichting Pequeno, and is published in association with Maastricht University. In this report, the VBDO tracks the development of responsible investment among nonprofit organisations. Last year, the VBDO concluded that most fundraising charities had a responsible investment policy, but applied it in a limited fashion and were not very transparent about the policy or the implementation thereof. Foundations were only very hesitantly taking steps towards responsible investment and were not at all transparent about these steps. Results When comparing the results of last year s report to this year, the VBDO sees a number of positive developments. The response rate was significantly increased. In total, 34 organizations responded to the sent profile, leading to a response rate of 69%. In comparison with last year s results this is a big increase as the total response rate was 39% last year. This shows a greater willingness by the organisations to provide information on their responsible investment activities. Fundraising charities In terms of information provided to the VBDO about the responsible investment policies, an improvement can also be seen. Thirteen of the 18 organizations provided information on the content of their responsible investment policies. Looking at the implementation of the responsible investment policy, the most widely used instrument is exclusion. Other instruments such as positive selection, voting and engagement are much less frequently used. A positive development is that more fundraising charities are engaged in mission related investing. When it comes to reporting on the responsible investment activities, 14 of 18 fundraising charities provide information on the policy as well as the implementation thereof. The level of detail on this information varies greatly. Most fundraising charities that do not invest directly make use or have made use of sustainability criteria in the selection of banking services. Foundations Foundations on the whole provide little information on their responsible investment policy. Six of 24 foundations indicate that a responsible investment policy is in place for their investments or make reference to the implementation of responsible investment instruments; another 4 provided more detailed information. Six foundations indicate that they make use of exclusion criteria. Another 6 also engage in mission related investing, a definite improvement. Other instruments such as positive selection, voting and engagement are not applied by many organizations. In terms of accountability, only 2 organizations provide adequate information about responsible investment policy and the applied instruments. Another 6 reference their policy or application thereof, but do not provide more detail. For the 2 foundations that do not directly invest, it is unknown whether or not sustainability criteria play a part in the selection of banking services. Aggregated results From the total of 49 researched organizations 30 (61%) referred to or could show that they have a responsible investment policy. The most widely used instrument was exclusion. In total 19 (23%) of the (investing) organizations used this instrument, while positive selection has implemented at 23% of the organizations. MRI and impact investing has been implemented at 15% and 18% of the investing organizations, which is an increase with last year s results. The 6

7 active ownership instruments (voting and engagement) have both been implemented at 3 of the 39 investing organizations. Eleven organizations (22%) showed that they included sustainability criteria in their selection of bank for its deposits and/or reserves. This is mainly done by the non-investing organizations, which have implemented this instrument in 70% of the cases. Twenty-seven organizations (55%) have made information publicly available about either their responsible investment policy or the implemented instruments. Conclusions The VBDO sees it as a positive development that more fundraising charities and foundations are more open in providing details on their responsible investment policy. Another improvement is that they are increasing engaged in mission related investing. A growing number of organisations are seeing the benefits of making a contribution to the mission of their organisation, not just on the funds side, but also on the investment side of their activities. That being said, the VBDO concludes that little significant steps forward have been taken in incorporating responsible investment into the core activity of the of the researched organizations in the non-profit sector in the Netherlands. Even though there are exceptions, especially when it comes to mission related investing, there seems to be a marked lack of ambition among the majority of the researched fundraising charities and foundations, and a tendency to do the perceived bare minimum. Transparency remains an issue. Fundraising charities are, on the whole, more transparent about their responsible investment activities. At the same time, however, the lack of detailed information provided seems to suggest that fundraising charities and foundations expect the public at large to simply trust that they are investing their entrusted capital in a responsible way. Recommendations Based on these results and conclusions, the VBDO makes the following recommendations: Be willing to think of responsible investment as another means to achieve the goals of the organisation. Responsible investment should become part of the core activities of the organisation. A good start is by following the recently published VFI guidelines for responsible money management (Richtlijn Financieel Beheer Goede Doelen), where a number of general and organizationspecific issues and suggestions are raised. In order to do this, the following steps can be taken. These steps were first presented in last year s report, but are very much worth repeating here. Step 1: Clarify the situation - gather together the information needed to be able to review the charity s starting point, address concerns within the organisation and to be able to suggest how best to proceed. Step 2: Get responsible investment on the agenda - Once information has been gathered, it is important to bring the issue onto the agenda with important stakeholders within the organization in order to build agreement. Step 3: Set aims - Think about how investment links to the charity s mission, strategy, and risk assessment. Step 4: Develop or update your SRI policy consider which environmental, social and governance issues should be incorporated into the charity s investments and which approach to take. Step 5: Implement policy - In determining the best implementation strategy, trustees need to ascertain whether the existing services provided by fund managers are sufficient or whether additional expertise is required. Step 6: Report and review - With clearly defined aims and a written policy that is well researched and effectively transmitted, the charity is likely to gain from responsible investment. 7

8 Samenvatting Voor u ligt de tweede editie van VBDO-onderzoek Benchmark Goede Doelen en Vermogensfondsen. Deze rapportage is wederom mogelijk gemaakt door Stichting Pequeno en is gepubliceerd in samenwerking met Universiteit Maastricht. Door deze benchmark jaarlijks te publiceren volgt de VBDO de ontwikkeling van verantwoord beleggen bij de maatschappelijke instellingen in Nederland. In het vorige rapport kwam de VBDO tot de conclusie dat de meeste fondswervende organisaties een duurzaam beleggingsbeleid hebben, maar dat de implementatie van de duurzame beleggingsinstrumenten achterwege blijft, en dat de organisaties niet erg transparant waren over het beleid en de uitvoering daarvan. Vermogensfondsen namen zeer aarzelend stappen om duurzaam te beleggen. Resultaten In vergelijking met de resultaten van vorig jaar, signaleert de VBDO een aantal positieve ontwikkelingen. De respons op de vragenlijsten van de VBDO is verhoogd. In totaal 34 organisaties, ofwel 69% heeft gereageerd op het verzonden profiel. Vorig betrof het slechts 39%. Dit toont een aanzienlijk grotere bereidheid van de organisaties om informatie te verstrekken over hun activiteiten rondom duurzaam beleggen. Fondswervende instellingen Bij de fondswervende instellingen kan er een verbetering worden aangemerkt wat betreft het opstellen van het duurzaam beleggingsbeleid. Dertien van de 18 organisaties hebben kunnen aantonen dat ze een duurzaam beleggingsbeleid hebben. Wanneer er wordt gekeken naar de implementatie van het beleid, valt op dat uitsluiting het meest gebruikte instrument is. Andere instrumenten, zoals positieve selectie, stemmen en engagement, worden veel minder vaak gebruikt. Een positieve ontwikkeling is dat meer fondswervende instellingen betrokken zijn bij missie-gerelateerde investeringen. Als het gaat over de verantwoording van de duurzaam beleggingsactiviteiten, valt op dat 14 van de 18 fondswervende instellingen informatie geven over het beleid en de uitvoering daarvan. De mate van detail van deze informatie varieert sterk. De meeste fondswervende instellingen die niet direct investeren, maken gebruik van duurzaamheidscriteria bij de selectie van hun bank. Vermogensfondsen Vermogensfondsen hebben over het algemeen weinig informatie gegeven over hun duurzaam beleggingsbeleid. Zes van de 24 vermogensfondsen geven aan dat er een duurzaam beleggingsbeleid opgesteld is of verwijzen naar een of meerdere van de geïmplementeerde instrumenten; nog eens 4 geven gedetailleerdere informatie. Zes vermogensfondsen geven aan dat ze gebruik maken van uitsluitingscriteria. Nog eens zes geven aan dat ze ook bezig zijn met missiegerelateerde investeringen, een duidelijke verbetering met vorig jaar. Andere instrumenten, zoals positieve selectie, stemmen en engagement worden amper toegepast door vermogensfondsen. In termen van verantwoording, publiceren slechts twee organisaties adequate informatie over hun beleggingsbeleid en de toegepaste instrumenten. Zes andere refereren aan hun duurzaam beleggingsbeleid of de geïmplementeerde instrumenten, maar zorgen voor onvoldoende detail. Van de twee vermogensfondsen die niet rechtstreeks investeren, is het onbekend of ze duurzaamheidscriteria een rol laten spelen in de selectie van hun banken. 8

9 Samengevoegde resultaten Van de in totaal 49 onderzochte organisaties konden er 30 (61%) aantonen dat ze een duurzaam beleggingsbeleid hebben. Het meest gebruikte instrument is uitsluiting. Negentien (49%) van de (direct investerende) organisaties gebruikt dit instrument, terwijl 23% van deze organisaties het instrument positieve selectie heeft geïmplementeerd. Missiegerelateerde investeringen (21%) en impact investeringen (15%) zijn door een kleiner gedeelte van de organisaties geïmplementeerd, wat een stijging is met de resultaten van vorig jaar. De actief-aandeelhouderschap instrumenten, engagement en stemmen op aandeelhoudersvergaderingen, zijn beide uitgevoerd door drie van de 39 direct investerende organisaties. Elf organisaties (22%) lieten zien dat zij duurzaamheidscriteria hebben opgenomen in de selectie van de bank die ze gebruiken voor hun deposito s en/of reserves. Dit wordt voornamelijk gedaan door de organisaties die zelf niet direct investeren, want 70% van deze organisaties hebben dit instrument gebruikt. Zevenentwintig (55%) hebben informatie gepubliceerd over ofwel het duurzaam beleggingsbeleid of de implementatie van de duurzaam beleggingsinstrumenten. Conclusies De VBDO ziet het als een positieve ontwikkeling dat meer fondswervende instellingen en vermogensfondsen opener zijn bij het verstrekken van gegevens over hun duurzaam beleggingsbeleid. Een andere verbetering is dat deze organisaties steeds meer betrokken zijn bij missiegerelateerde investeringen. Een groeiend aantal organisaties ziet de voordelen van het maken van een bijdrage aan de missie van de organisatie niet alleen aan de fondsenzijde, maar ook op de investeringenkant van hun activiteiten. Daarentegen valt het de VBDO op dat er in het afgelopen jaar weinig significante stappen voorwaarts zijn gezet in de integratie van verantwoord beleggen in de kernactiviteiten van de onderzochte organisaties in de non-profit sector in Nederland. Hoewel er zeker uitzonderingen aan te merken zijn (vooral op het gebied van missiegerelateerde investeringen), lijkt er een sterk gebrek aan ambitie onder de meerderheid van de onderzochte fondswervende instellingen en vermogensfondsen te zijn, en de neiging te bestaan om het absolute minimum te doen. Transparantie blijkt ook een probleem te blijven. Fondswervende instellingen zijn over het algemeen transparanter over hun (duurzame) beleggingsactiviteiten. Tegelijkertijd lijkt het gebrek aan gedetailleerde informatie te suggereren dat fondswervende instellingen en vermogensfondsen er vanuit gaan dat het door het publiek toevertrouwde vermogen op een verantwoorde manier wordt geïnvesteerd. Aanbevelingen Op basis van hiervoor gepresenteerde resultaten en conclusies doet de VBDO de volgende aanbevelingen: Wees bereid om duurzaam beleggen te zien als een andere manier om de doelstellingen van de organisatie te bereiken. Verantwoord beleggen dient deel uit te maken van de kernactiviteiten van de organisatie. Een goede start is het volgen van de onlangs gepubliceerde VFI-richtlijn Financieel Beheer Goede Doelen, waarin een aantal algemene en organisatie-specifieke problemen en suggesties worden uitgelicht. Om verantwoord beleggen tot de kernactiviteiten te laten behoren, kunnen de volgende stappen worden genomen. Deze stappen zijn voor het eerst gepresenteerd in het onderzoek van vorig jaar, maar zijn zeer moeite waard om hier te herhalen. 9

10 Stap 1: Verduidelijk de situatie: Verzamel de informatie die nodig is om het startpunt van het goede doel te bepalen en analyseer de bezwaren binnen de organisatie om te bepalen hoe verder te gaan. Stap 2: Zet duurzaam beleggen op de agenda: Nadat de informatie is verzameld, is het belangrijk om duurzaam beleggen op de agenda te krijgen bij de belangrijke stakeholders binnen de organisatie om intern tot overeenstemming te komen. Stap 3: Stel doelen: Denk na over hoe de investering relateert aan de missie, de strategie en de risico-evaluatie van de organisatie. Stap 4: Ontwikkel of vernieuw het duurzaam beleggingsbeleid: Ga na welke milieu-, sociale en bestuurselementen dienen te worden opgenomen in de beleggingen van het goede doel en welke aanpak gebruikt wordt. Stap 5: Implementeer het beleid: Bij de bepaling van de beste implementatiestrategie dienen de beheerders na te gaan of bestaande diensten die aangeboden worden door de vermogensbeheerders voldoende zijn of dat aanvullende expertise vereist is. Stap 6: Rapporteer en evalueer: Door middel van een schriftelijk beleid en duidelijk omschreven doelen, die goed zijn onderzocht, zal de maatschappelijke instelling profiteren van duurzaam beleggen. 10

11 1 Introduction The report you have in front of you is the second annual edition of the VBDO Benchmark study among fundraising charities and foundations in the Netherlands. This report has once again been made possible by Stichting Pequeno, itself a foundation, and is published in association with Maastricht University. In this report, the VBDO tracks the development of responsible investment among non-profit organisations. This is done by providing insight into how fundraising charities and foundations formulate, implement and account for their responsible investment activities. Last year s edition of this report showed that the majority of fundraising charities had a responsible investment policy, while less than half provided insight into the content of these policies. In terms of implementation, the most commonly used instrument was exclusion, followed by positive screening. Finally, a little more than half of the organizations reported on the responsible investment policies and less than half on implementation of these policies. In general, the VBDO concluded that most fundraising charities had a responsible investment policy, but applied it in a limited fashion and were not very transparent about the policy or the implementation thereof. For foundations, approximately one-third of the surveyed organizations were able to indicate that they had a responsible investment policy. Even less were able to show how they implemented this, and about a quarter of all surveyed foundations provided publicly available information. In short, the results seemed to indicate that foundations were only very hesitantly taking steps towards responsible investment and were not at all transparent about these steps. The report concluded by providing a number of recommendations, provided by the EIRIS Foundation in the UK, on the necessary steps that can be taken when formulating, implementing and reporting on the responsible investment policy. This report is divided into a number of chapters. Chapter 2 provides an overview of responsible investment in the non-profit sector, focusing the unique opportunity responsible investment provides these organisations to make a buck and the world a better place. The following chapter, chapter 3, contains information about the research objective and methodology used to come the results. These results are presented in chapter 4. The report concludes by making some concluding remarks and recommendations in chapter 5. The individual profiles of the charities and foundations have been included in appendix 1. 11

12 2 2.1 Making a buck and the world a better place 1 Separation or connection? Actually, the key question for charitable foundations is not so much to invest, but to pursue your objective. It is important to reflect on what kind of foundation you want to be. 2 In a recent contribution to the discussion on responsible investing, Prof. Dr. Robert van der Meer separated the two sides of charitable foundations, while at the same time demonstrating the necessary connection between the two. On the one hand, there are the foundation s liabilities. These usually reflect the foundation s reason for existence. The other side is the asset side. This side comprises the resources that make it possible for a foundation to live up to its mission. On the balance sheet the assets are, as a matter of course, financial in nature. Nevertheless, foundations usually have more to offer than just financial support. Apart from the financial means, in quite a few cases recipients of a foundation s benevolence also receive in kind assistance e.g. advice or making use of the foundation s facilities. In order for the recipients to benefit fully from the grant or the investment, the reputation of the donor becomes increasingly important. A case in point was the Bill and Melinda Gates Foundation. In 2007 the foundation s investment policy was severely criticized by the Los Angeles Times for investing in companies whose activities were detrimental to the mission of the foundation and its grant-making. Blind-eye investing and pharmaceutical apartheid The Gates Foundation is the single largest private foundation in the world. With a budget largely exceeding one billion dollars per annum the foundation contributes to a wealth of charitable causes. The causes vary from poverty alleviation to increased access to education and health care. In 2007 the Los Angeles Times accused the foundation of investing its endowment in a way that annihilated the positive effects of its grant making and knowledge sharing. The foundation misses the virtue of consistency, as Peter Kinder calls it 3. An interesting example comes from the investments worth USD 243 million in companies that polluted the Niger Delta, like Eni, Royal Dutch Shell, Exxon Mobile Corp., Chevron Corp. and Total. The effect of their pollution extended to the poor health and safety of communities living in the area. Examples of diseases that could be attributed directly to the activities of the companies e.g. flaring are asthma, bronchitis, and a variety of eye diseases. The LA Times interestingly qualified the foundation behavior as blind-eye investing. The critique, however, also relates to the behavior of Big Pharma. Even though the largest pharmaceutical companies in the world are well aware of gigantic struggle of African nations with HIV/AIDS issue, they turned a blind eye to the needs of the population particularly protecting their patents. As a result, the newspaper accused the Gates Foundation, which was heavily invested in these companies at the time, of pharmaceutical apartheid. Box 1 Investing according to the Gates Foundation 1 This chapter is prepared by Prof. Dr. Harry Hummels is Professor of Ethics, Organisation and Society at Maastricht University and fellow of the European Centre for Corporate Engagement. In addition, he is managing director of SNS Impact Investing, the development investment arm of SNS REAAL. 2 Interview with Prof. Dr. Robert van der Meer, FIN, September 2011, 3 Peter Kinder, Virtue of Consistency, mei 2008, 12

13 The Gates Foundation is certainly not the only foundation applying the separation thesis: the deliberate separation between the management of the assets and the foundation s mission in terms of its liabilities towards its beneficiaries and society at large. Traditionally, many foundations have erected high walls between the two operational sides of business. This is a result of a poorly understood notion of fiduciary responsibility. In the words of Kramer en Cooch: In theory, the board s duty is not only to protect and grow the assets of the foundation, but to use those assets to help achieve its public purpose and social mission. In practice, however, some board members are wary of any investments that depart from maximizing the foundation s risk-adjusted financial returns. 4 The question that arises as a result of the confrontation between the previous confrontation between the LA Times and the Gates Foundation is: what is the use and purpose of funding a good cause if the positive effect that comes from that is wiped out by the impact of the foundation s investments? As D.K. Matai, co-founder of The Philanthropia, remarks: What is the point of earning a high return in China if my money is helping to build Dickensian working conditions? If I have $ 5 billion, and I am giving $ 4 billion away, do I really want a 17 percent return on activities that are wrecking the world? 5 A foundation that walks the talk and at the same time talks the walk is Fonds Professor Van der Meer is a member of the Investment Advisory Board of the foundation that is considered to be a frontrunner in responsible investing. In addition, according to Van der Meer, Fonds 1818 is quite unique in its focus on mission related investments. Even though the mission related investments do not offer maximum financial returns 6, they add value to the realisation of a foundation s objectives. But because of the risks involved and the potential discount on the financial return of the investment, a professional approach towards making mission related investing is required. Last year the VBDO report Doing Good and Sharing It provided an overview of the current state of affairs regarding Dutch charitable foundations and fund raising charities in terms of the sustainability of their investment policies and portfolios. The 2011 report marks the improvements that have been made in a year s time. This opening chapter is an attempt to provide an overview of some relevant developments in the sector that have taken place. It provides the context for the survey. Topics that will be addressed in this chapter are in this order the volatility of the financial markets, the increasing importance of responsible investing, the introduction of a new concept: shared value and the rising interest in impact investing, and finally, the growing collaboration in the sector in light of reduced government funding. The first four issues deal with the management of assets, the last topic relates to the liabilities and increased effectiveness of charitable grants and funding of foundations and fund raising charities. The choice for these topics obviously reflects the focus of this report, which is mainly on the management of the assets and to a lesser extent on grant making and funding. 4 Mark Kramer en Sarah Cooch, Investing for Impact, 2006, p The Economist, The business of giving, 25 February This assessment may be the logical consequence of the way that Fonds 1818 has operationalised its approach towards MRI. The foundation invests, for instance, in a local newspaper or the The Hague Tuk-Tuk Company. Investing in local companies is, however, not the only way to operationalise this new type of investing, let alone the necessary operationalisation, as I will explain in this chapter. 13

14 2.2 Volatility of financial markets What do the following dates in August 2011 in common: 3, 4, 8, 10, and 18 August? The answer is that on all of these days the AEX, the leading index of the Amsterdam Exchanges, lost at least 3% of its market value 7. And the instability and uncertainty continued, when on 5 and 22 September the market lost again some 4.5% of its value. Compared to the US markets, where major indices like Dow Jones, S&P 500 and Nasdaq have lost less then 10% of their value, the European exchanges have performed poorly in The Dutch AEX took a free fall from 354 at year-end 2010 to 273 in the beginning of September. Other continental markets did not perform much better and all lost a significant part of their capitalization. The following box shows the overview of some of the major market indices between the closing of the market on 31 December 2010 and 7 September CAC DAX FTSE AEX S&P Dow Jones Industrial Average Nasdaq Box 2 Developments on major financial markets in 2011 What were the consequences for both charitable foundations and fund raising charities? Referring to some specific examples, this paragraph outlines some of the differences between the two. The impact on charitable foundations On the surface, the crisis appears to have different implications for charitable foundations and fund raising charities. Where the latter do not report a major setback in their financial situation, the foundations are hit severely by the crisis. Fonds 1818 reported that it was in the middle of a conversion of its portfolio. It was reducing its exposure to listed equities from 60% of the portfolio in 2007 to 40% in later years. In addition, a more diversified investment strategy was implemented. In the new investment policy, it was decided to increase the exposure to other asset classes. Real estate (15% of total investments), commodities (10%), hedge funds (10%) and mission related investing (5%) were added to the portfolio. As the foundation reported in its 2010 Annual Report the transition is in process but was not yet fully completed. Adding high quality real estate investments and mission related investments to its portfolio provides a considerable challenge in turbulent times. Also other foundations, which are largely dependent for their program funding on the returns of their investment portfolios, have been hit hard by the crisis. It is highly likely that the entire sector will report significant losses over The reason is that charitable foundations unlike many fund raising charities accept higher levels of risk for their investment portfolios 8. To keep up with inflation and to raise the amount of capital available for executing their mission, foundations increasingly act like (institutional) investors. They have diversified investment strategies consisting of, among others, equities, bonds, credits, cash and alternatives. A good 7 The losses on the days mentioned amounted to: 3 August - 3 percent; 4 August - 3 percent; 8 August - 4,4 percent; 10 August - 3,4 percent; 18 August - 4,5 percent. 8 Due to the fact that fund raising charities are working with public money and are under permanent scrutiny, most charities have decided to invest (very) defensively. Many charities will only invest in what they see as safe havens, like Dutch or German government bonds or depositing their cash. Key notions are: low risk, high liquidity, and transparency. These charities feel they have to be able to explain (the execution of) their policies, since they are always in the public eye. 14

15 example is provided by Prins Bernhard Cultuurfonds 9. The asset allocation of the fund a total of 146 million is as follows: Allocation end of 2010 Strategic asset allocation Bonds 49% 50% Equities 38% 35% Real Estate 4% 5% Hedge fund(s) 9% 10% Box 3 Asset Allocation PBC In 2010, the portfolio achieved a return of 8.1% a small increase of 0.1 percent compared to In the period , the return on the investment portfolio amounted to 3.1%. Another example comes from Van Leer Group Foundation. The value of the global investment portfolio totalled the amount of 606 million at the end of The total return on assets amounted to 16.6% even though the foundation only expects a return of 4.5% annually. Not all charitable foundations have asset allocations like the ones previously mentioned. Take the Dutch Oranje Fonds 10. The fund formulated an investment policy characterized by five key criteria: relevance, reputation, return, risk and robustness 11. Two-thirds of the foundations 166 million in assets are invested in government and corporate bonds. Nearly twenty percent is invested in equities, while another 9% is invested in historic real estate in The Netherlands like water towers. The last 5% is kept liquid. In light of its objective to return 3.5 to 4% on its portfolio, the actual 5.5% the foundation made in 2010 clearly meets expectations. In light of the turbulence in the European and other financial markets, one does not need a crystal ball to predict that realised returns in 2011 will be quite poor for many funds. Van Leer Group foundation already envisaged the downturn. In its 2010 report it writes the following: In 2011 the foundation will review its spending policy and investment policy to evaluate whether the 4.5% expected return is still a realistic return in the current financial climate. It is not unlikely that a lower expected return and therefore lower spending will result. 12 Fundraising charities Generally speaking, fund raising charities have a different approach to managing their investments. Unlike charitable foundations, which usually make private money available for public purposes, fund raising charities allocate public money to the public good. This specific characteristic has had and still has great impact on the ways that fund raising charities manage their financial reserves 13. They are cautious not to lose the public trust as a result of their investment results both positive and negative 14. This means that as long as they have to manage Oranje Fonds is a hybrid institution. It is a charitable foundation with an endowment that it manages, while at the same time raising funds among the general public for its charitable activities. 11 The last r of robustness is a personal translation of the author of this chapter of the Dutch word rust. It refers to the tranquillity and peace of mind that are the result of a robust investment management Charitable foundations usually refer to their core capital in terms of their endowment. Fund raising charities, on the other hand, talk about their financial reserves. The difference is important, since the fund raising charities are not at liberty to accumulate their reserves indefinitely. Foundations are free to manage their endowment at their own discretion. In order to protect their ANBI-status they are, however, required to show that they make a significant contribution to the public good defined in their mission. 14 If the results are very positive, this opens the debate on why the population would still needs to donate money to charity. If results are (very) poor this opens the discussion on prudence and stewardship. The money was given to be used for the mission and not to be saved for a rainy day. 15

16 financial reserves, fund raising charities for the most part have a rather low risk profile. They tend to invest in government bonds, credits and if at all only for a very small part in (listed) equities. Some even keep their money on a savings account 15. The Salvation Army (Leger des Heils) is a good example. The Dutch Salvation Army invests its portfolio of 89 million on the basis of a set of ethical principles that are strictly applied in a structured process. To objective is to obtain a maximum financial return within the boundaries of its ethical convictions. To assess the ethical quality of its investment portfolio the Salvation Army does not rely on external portfolio managers. It has hired an independent information provider to advise the Army on which investments to make and which not. Following the financial crisis in 2009 the organisation decided to change its investment strategy. As of 2010, the Salvation Army no longer invests in listed equities. Instead, between 2011 and 2013 it wants to gradually increase its investments in fixed assets, such as real estate, that are directly related to (the execution of) its mission. Approximately 7 percent of the portfolio will be invested in impact investments like microfinance. KWF Kankerbestrijding was one of the first to divest its listed equities portfolio. Following the Zembla broadcast in 2007 the organisation decided to sell its portfolio of stocks and invest in bonds. Even though fixed income investments are not insensitive to market fluctuations, it is undoubtedly true that the risk exposure is significantly reduced due to the sale of its listed equity portfolio. De-risking may be an important strategy for charitable organisations to manage their assets prudently and safeguard their reputation. It will not protect them from the downfall resulting from the various financial crises the ones that we had and the ones still to come. According to Dutch VFI the Association of Fundraising Organisations fund raising charities will suffer the consequences of the financial crises. In the first place, there is an increasing pressure on financial returns due to the volatility in the global financial markets. But second, the services and support of fund raising charities are in high demand. Many charitable causes turn to the fund raising charities for support and that demand is only expected to increase 16. In times of financial and economic distress, in which the government drastically cuts its subsidies, it is quite unlikely that fund raising charities are able to fill the gap. According to Professor Theo Schuyt, the general public is not inclined step up its financial contribution to the sector to cover up for the loss of government support The increasing importance of Responsible Investing The perceived lack of consistency in the approach of the Bill and Melinda Gates, with which we opened this chapter, demonstrates the growing concern in society about a charitable foundation s investments. Dutch media have taken a special interest in the subject in particular in stories that easily lead to an outburst of moral discontent. Because perceptions can have real consequences, charitable organisations increasingly have to watch their backs. Ever since the media started to report on the impact of what charities do, there is a gradual increase in the awareness and the willingness among charities to address social, environmental, or cultural issues in their investments. Usually, the media lose their appetite for topics like responsible investing after they have exposed what they see as wrongdoing, but not this time. Following the famous Zembla broadcast in 2007 and an edition of Kassa in 2009 Dutch broad- 15 Reasons for this vary from avoiding any financial risk to the necessity of having immediate access to the reserve (high liquidity requirement) and from the cost of managing assets to (failing to pass) the threshold of financial capital that makes it worthwhile to invest

17 cast organisation VARA 18 brought up the issue once more at the end of November of The research of Uitgesproken VARA showed that some fundraising organisations were still invested in corporations involved in the production of, for instance, controversial weapons. Before the media attention started, there were only a few organisations that considered responsible investing an important issue requiring board attention. The number has increased significantly in the last few years not in the least because the active involvement of the sector organisations. Two years ago, the VFI provided its members guidance regarding the environmental, social and governance (ESG) aspects of their investments 19. Also, in 2009 and 2010, the Association of Dutch Charitable Foundations, the FIN, explicitly paid attention to the topic of sustainability focusing on sustainable investing and on the way the members conduct their business in line with general principles of sustainability 20. In May 2010, Drs. Rutgers and Dr. Willemsen published a book entitled Goed Geldbeheer (responsible money management), geared towards fundraising charities and foundations in the Netherlands. It was set up to be a handbook for controlling (investment) risks. This handbook also includes a chapter on the socially responsible behaviour behavior, and identifies responsible investment as an important area of focus. It provides details on how fundraising charities and foundations can manage risks in terms of responsible investment, focusing on exclusion, positive selection, green investment, active shareholders and mission-related investments 21. The focusing by charities on Responsible Investing is part of a wider movement addressing the importance of ESG-factors in the investment process. International organisations like the OECD or the World Economic Forum (WEF) have written on the subject recently. The box below reveals the view of the both organisations on responsible investing. World Economic Forum The WEF launched its White Paper called Accelerating the Transition towards Sustainable Investing in January According to the organization sustainable investing has the potential to become a mainstream approach among a broad range investors, especially those who are in a position to take a longer-term perspective. Key drivers, the report argues, include: Growing awareness within the investment community that global mega trends such as climate change and natural resource scarcity ( ) are becoming increasingly financially material; Increasing demand from large asset owners; Increasing demand from retail investors (including high net worth individuals). With a clear focus on superior risk-adjusted returns, sustainable investing is consistent with the fiduciary duty of many institutional investors to maximize those risk-adjusted financial returns. The rationale for the superior performance is that sustainability considerations have the potential to drive the creation of business value, thereby strengthening the financial performance of companies. To accelerate this process of transition, the report argues, leadership from all stakeholders across and around the investment value chain is required. Box 4 World Economic Forum on Sustainable Investing The guidance was based on the report Investeren in een betere wereld. The report was an initiative of four leading fundraising charities, together with Maastricht University. 20 The increasing importance of responsible investing among charitable organisations is not yet reflected in the work of CBF the Dutch Certification Board for fundraising charities. Also, in assessing the social value added for charitable organisations to receive the ANBI-status a status granting the organisations tax benefits the issue of responsible investing is not part of the list of criteria for receiving the desired status. 21 Drs. Liesbeth Rutgers and Dr. René Willemsen, Goed geldbeheer: leidraad voor het verantwoord nemen van risico s, 2010, p

18 The OECD addresses the issue of promoting and investing in sustainable growth from a different angle. As to be expected from a multilateral organisation, the focus is more on the legal and governance framework that stimulates investing in growth and sustainable development worldwide. OECD According to the OECD Investment Committee promoting investment for growth and sustainable development in a globalizing world is core to the mission of the organisation. The Committee seeks to increase the capacity of non-members to attract more investment by engaging in dialogue and sharing best practices for promoting a favourable environment for both foreign and domestic investments. As such the OECD wants to create an environment in which multinational companies can operate in a responsible way, while global investors can invest in development responsibly. It works in partnership with non-oecd organisations and countries, it promotes principles and best practices, and demonstrates the positive effects of its work on corporate responsibility. Box 5 Organisation for Economic Cooperation and Development on sustainable investing A clear signal that the subject is gaining momentum comes from the Principles for Responsible Investing (PRI). This organisation, backed by the United Nations, has grown in the last few years to a little over 900 members with Assets under Management exceeding USD 25 trillion. Currently, nearly all of them are institutional investors pension funds, insurance companies and asset managers. It is to be expected that charities will increasing adopt the 6 principles of the PRI as part of a growing interest in transparency. PRI Principles We will incorporate ESG issues into investment analysis and decision-making processes We will be active owners and incorporate ESG issues into our ownership policies and practices We will seek appropriate disclosure on ESG issues by the entities in which we invest We will promote acceptance and implementation of the Principles with the investment industry We will work together to enhance our effectiveness in implementing the Principles We will each report on our activities and progress towards implementing the Principles Box 6 Principles for Responsible Investing The focus on responsible investing of the abovementioned organisations is reflected in the increasing percentage of assets under managements that is invested using sustainability and responsibility checks. The VBDO publishes its trend report every year, while organisations like Eurosif and the US Social Investment Forum report bi-annually. The message is always the same: responsible investing is on its way up and about to become indispensable as part of every investment manager s toolkit. An interesting new field of attention, addressed in the next paragraph, is the focus on the simultaneous creation of financial, economic and social value under a variety of names such as impact investing, mission related investing or targeted investments. 18

19 The increasing amount of attention for responsible investment can also be seen in the increasing amount of attention paid to this topic by the umbrella organisations. A number of events have been organised that address this issue in the last few years. Both organisations also published material designed to help their members in the decision-making around responsible investment. In September 2011, the VFI released its Richtlijn Financieel Beheer. This guideline money management also addresses the topic of responsible investment. In particular, it makes clear that responsible investment covers all types of financial investments, including savings accounts. A number of general and organization-specific sustainability issues are included that need to be considered, as well as mission-related investments. It also includes a section that provides details on how to report on the financial and non-financial results of the investments. 2.4 Creating shared value and investing for impact In January 2011 Michael Porter and Mark Kramer called upon business to create shared value. Their article, which was published in the Harvard Business Review, was not another plea for social responsibility per se. Instead they took Milton Friedman s argument one step further by arguing that in the current global business environment the creation of societal value is in the interest of the shareholders. Or in their own words: Shared value ( ) points toward a more sophisticated form of capitalism, in which the ability to address societal issues is integral to profit maximization instead of treated as outside the profit model. 22 This is not about companies being good or bad, Mr. Kramer added in the same issue of the New York Times. It s about galvanizing companies to exploit the market in addressing social problems. In the Harvard Business Review they describe a number of examples going from the development of new business opportunities to rationalizing the supply chain. All in the interest of both society and the shareholders. Their article more or less captures the core of what currently is called impact investing. Ever since the Monitor Institute published its report on Impact Investing in 2009 the interest in the subject has tremendously risen. The issue as such is not new, but the framework that the Monitor Report provided was helpful in canalizing the divers initiatives already taking place. Impact investing, which we define as the entire spectrum of investments aiming to create shared value, can be seen as an integrative approach to wealth creation 23. Impact investors deliberately and willingly pursue labour, environmental, cultural, religious, or societal returns, while making a solid financial return 24. In addition, they look at non-financial criteria relevant for the communities in which the investments are made. This simultaneous realisation of financial and non-financial objectives is at the heart of Porter and Kramer s notion of shared value This new, integral approach to investing is distinguished from an ESG-approach to investing. Impact investing as creating shared value is about the creation and fair distribution of prosperity. It combines solid financial returns with social, environmental and community wealth and takes the business rationale as its point of departure. In this chapter we disagree with the WEF, claiming that The focus on superior risk-adjusted financial returns distinguishes sustainable investing from similar-sounding approaches such as impact investing or socially responsible investing, in which lower financial returns can be accepted as a trade-off for meeting social or environmental goals. It is simply in the eye of the beholder in this case the investor how he or she defines impact investing, sustainable investing, or (socially) responsible investing. 24 For institutional investors the return needs to be at the level of what is considered to be a market rate return. The term market-rate refers to a risk-adjusted return that is equal to or exceeds the relevant benchmark of a particular investor. Institutional investors usually start with the assumption that based on their fiduciary responsibility toward their beneficiaries their investments need to be in line with or exceed relevant benchmarks. Charitable organisations usually have higher tolerance than institutional investors for investments with a target financial return (just) below the market rate. 25 Michael Porter, and Mark Kramer, Creating Shared Value, Harvard Business Review, Jan/Feb 2011, pp

20 Traditionally speaking, impact investing comes from the realm of charitable foundations. It gradually came to mind there are more ways to achieve its objectives than simply to allocate 3 to 5% 26 of the endowment to the mission. Investing money in charitable causes and receiving a financial return can be as effective in achieving the mission. These investments often go by the name of mission-related investments 27, mission connected investments 28, mission investing 29, social venturing 30, venture philanthropy or, more recently, impact investing. The investor wants to bring the program of the foundation and the management of the investment portfolio on the same footing both contributing to the mission of the organisation. Traditionally, there was a gap between the investment objectives and those of the program board of the foundation, as we have seen in the case of the Gates Foundation. Recently this is changing even though the pace of change is not very fast. But change is needed and can no longer be avoided, as Rien van Gendt, chairman of the Dutch Association of Foundations, the FIN, recently remarked 31 : Foundations become more relevant, visibility increases. Criticism on the fact that you spend 5%, get a 100% tax exemption and forget the social dimension when investing the remaining 95%. To clarify the meaning of impact investing the remainder of this paragraph contains some examples of impact investments, starting with sustainable real estate. Responsible Real Estate Recently Professors Piet Eichholtz, Nils Kok and Rob Bauer of the European Centre for Corporate Engagement (ECCE) at Maastricht University published their second Global Real Estate Sustainability Benchmark (GRESB). Based on a survey of 340 of the largest property funds reporting on the environmental performance of their investments they found that CO 2 emissions have dropped some 2 percent since The result is not earth shattering. What is interesting, however, is the total of 65 Green Stars. These are the top-performing funds 32. One of the Green Stars is London-based Climate Change Property Fund (CCPF). The fund invests in UK office buildings at prime locations in London, Manchester, Edinburgh, and Birmingham, in the proximity of public transport facilities. The objective of the fund is to realise excess financial returns outperforming the benchmark while reducing the emission of CO 2 and the use of water, gas, and electricity. According to the report CCPF has demonstrated leadership in execution of its mission and policies. With a partly realised IRR of more than 20 percent annually and a significant reduction of its environmental pressure the fund has lived up to its promise. Green alpha is more than just a nice slogan. Development finance The second example comes from the world of emerging market debt. Development Finance Institutions (DFIs), like IFC, EBRD, the Inter-American Development Bank, or the Dutch FMO, provide funding in emerging economies. The loans will be made available to education boards, sustainable energy facilities, sanitation boards, housing projects, farmlands, et cetera. These loans have a clear social objective while returning approximately 250 basis points on top of LIBOR on an annual basis over the last five years. Recently, the DFIs have made it possible for other institutional investors to co-invest in these loans by means of so-called B-loans. The loan 26 In the USA the Internal Revenue Service (IRS) decided that in order to become tax exempt a foundation has to donate at least 5 percent of its endowment to its stated mission annually. 27 F.B. Heron Foundation 28 NEF, Mission Possible, London, Cooch, S., and M. Kramer, Compounding Impact: Mission Investing by US Foundations, Boston, 2007, p Prof. Dr. Gert van Dijk, Tilburg University, The Netherlands talks about social venturing. 31 FIN Newsletter, June Next year, the researchers will be integrating the financial performance of the funds in the survey. This will allow them to assess both the environmental quality of the funds surveyed and their financial performance. 20